Can businesses prepare for the unpredictability of a trade war?

For nearly two months, the financial markets have been on edge as investors, politicians and business owners gauge the likelihood of a global trade war.

Ever since the Trump administration started down a road of American protectionism back in February, announcing tariffs against specific industries and countries in an effort to help domestic businesses, the term trade war has been thrown around quite a bit.

When the White House announced a 25% tariff on steel and 10% on aluminum imports, Europe was quick to warn against inciting a trade war and fired back with its own suggested tariffs on specific U.S. items like motorcycles and bourbon made in Republican held states. One day trade tensions were high, the next day they were easing. And for a while, it seemed like the likelihood of a trade war was less imminent.

That was until reports in early March of the Trump administration targeting China with $50 billion in tariffs as a form of payback for alleged intellectual property theft. By the end of the month, Trump signed an order to impose the tariffs and China fired back with $3 billion of its own levies against U.S. goods.

Talk of the trade war returned in early April as the White House unveiled a second round of tariffs – $100 billion worth – targeting China. It was China’s turn to fight back, but President Xi Jingping took a more pacifying approach. One day Trump’s tweeting a complaint about trade with China, the next day he’s sending out an optimistic tweet about a possible deal between the two nations. Or even saying the tariffs between the two countries may never actually happen.

It’s a lot to keep up with. What exactly is a trade war? When does it start or end? Are we already in it? And does anyone really win?

It’s hard to answer many of these questions in a straightforward manner, since there are a lot of varying opinions on them. Some analyst say we are already in the trade war and the back and forth tariffs, and their impact on the markets, is proof of that. Other economists say this is simply a “threat-counter threat environment” since the tariffs themselves have not taken effect. Then there is the argument the Trump administration has made that the trade war with China was lost years ago and they are simply trying to combat unfair practices.

If the tariffs actually go into effect, the short-term impact is an increase in prices for domestic businesses and consumers that buy those imported goods. But the longer-term consequences can be more complex, impacting more than the just the country the tariffs are targeting. Not only can prices rise for the domestic goods, price can change for similar product and industries. Sometimes this even leads to unintended domestic layoffs.

Small businesses that operate internationally are usually the first to be impacted by tariffs and trade wars. Unlike large corporations, small businesses usually can’t afford to absorb higher supply costs and often have to take the price that comes to them. They don’t want to raise the prices of their products in fear of losing out to the competition.

In the United States, small business account for the majority of exporters and importers. According to a study by the International Trade Administration, 98% of U.S. exporters and 97% of importers are small to medium-sized businesses. However, they only make up about one-third of the total trade value. While many small businesses participate in international trade, their operations are not high-value, making the impact of a price changes from tariffs more damaging.

Right now, the future is unclear and changing by the day, but there are some past trade war-esque events that could give us more insight into what all this means and where we could be headed.

2002 Bush Administration steel tariffs

A relatively recent event we can learn from is when the Bush administration slapped a 15-30% tariff on various foreign steel products in 2002.

Many of the manufacturers consuming steel were small businesses and many of them switched their orders from foreign suppliers to domestic steel mills to avoid the tariffs. The U.S. steel industry saw incredible demand and went from operating at 70% capacity to 100%. Steel prices increased 60% and the U.S. steel producers couldn’t keep up with the demand.

One study in 2003 suggested that 200,000 Americans lost their jobs in 2002 due to higher steel prices, representing $4 billion in lost wages.

In 2003, The World Trade Organization came out against the tariffs and the Europe Union threatened tariffs on Florida oranges and cars in Michigan – two swing states in a presidential election. The Bush administration ended the tariffs in December 2003, two years before they were originally set to expire, and less than a year before the 2004 presidential election.

U.S.-Canadian relationship in the late 19th centuryNAFTAS

Trade wars are not just a modern-day occurrence, and are often drawn out over decades.

After the Civil War, U.S. Republicans enacted forms of protectionism and repealed the country’s reciprocity treaty with Canada.

Canadian conservatives also adopted protectionism practices with tariff retaliation. Many U.S. companies moved production facilities to Canada instead of paying for the higher import cost. The attempt by the U.S. to prevent outsourcing actually caused outsourcing.

But the back and forth of tariffs didn’t end there. In 1890, the United States passed the McKinley Tariff, which raised protective tariff rates nearly 50%. This caused agricultural exports to Canada to fall by 50% in the next two years.

Years later, in 1897, the United States passed the Dingley Act and Canada moved to create closer trade ties with Britain instead. The road to free trade between the United States and Canada lasted another century to when NAFTA was signed in 1993.

Unintended global consequences

Both historic examples started out as ways for politicians to protect a group of people or businesses, but the impact spread beyond the industry or country. This is often the case for tariffs. In today’s highly global society, it is even more difficult to place a tariff on one product, or against one country, and not impact others in the supply chain.

A study in 2011 showed that only two-thirds of China’s gross exports came from value added in China while other countries like the U.S., Japan and South Korea also contributed. Applying this to the current steel tariff by the Trump administration, tariffs on steel imports would not only impact China, but also Australia, Brazil, India, Iran and South Africa, which produce iron ore.

Similarly, China’s proposed tariff on American-made cars wouldn’t necessarily hurt General Motors or Ford Motor. Those companies make most of their cars for Chinese buyers through joint ventures in China, according to Bloomberg Businessweek. However, German companies Daimler AG and BMW AG do export cars from plants in the United States to China. American workers at those plants could be impacted if the German companies decided to shift their manufacturing to another country because of the tariff.

Proactive diversification

The end results of the protectionist measures by the Trump administration and retaliatory tariff threats by other countries are difficult to predict, but there are some things small businesses can do to prepare for the various effects.

If a business imports a majority of a good it uses from a supplier in one country, it could be smart to look for suppliers in other countries just in case. For the steel and aluminum tariffs, there are certain countries, like Canada, Mexico, South Korea and Brazil that are exempt from the tariff. Those countries are also the top U.S. steel importers.

If a small business gets a majority of its steel from Brazil, but then Brazil hypothetically falls off the exemption list, the company will be better off if it also gets steel from the other countries.

The same goes for exporters. If a U.S. business supplies products to Chinese partners, but then there is a tariff placed on that product, the price they need to charge will likely increase. Exporting to other countries could allow companies to keep prices steady in areas where tariffs are not placed.

Businesses can also look for cost-cutting measures throughout the organization, such as certain software to streamline processes. The money saved now will allow more cash flow if tariffs make a dent.

Companies that have to pay suppliers abroad could save on bank wire transfer fees and use an international payments specialist like WorldFirst instead. WorldFirst’s technology allows companies to conveniently make payments abroad and access competitive exchange rates.

For now, the trade threats between the U.S., China and the E.U. have yet to become reality. If they do, globalization makes it hard for even the best economists and business leaders to predict what will happen. For small businesses, taking a few easy steps now could positively impact business even if a trade deal is reached.